Life Sciences Newsbrief: The Penny Drops: SME Innovation Rises – 2012 Federal Budget

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The 2012 Federal and Provincial budgets released to date partly focus on reinforcing economic strengths and opportunities to secure a brighter future. At the forefront of the opportunities is a greater focus on innovation, particularly for small and medium size enterprises (SMEs). This special edition of our Life Sciences Newsbrief focuses on industry developments arising from the 2012 Canadian budgets.

Key Developments | Other Federal Developments | Other Provincial Developments

Key Developments

As we predicted in our recent article in Biotechnology Focus magazine, the Jenkins Report had a significant impact on the 2012 Federal budget. However, contrary to the rumour mill prior to the budget, the impact was refreshingly positive for SME's in life sciences and other technology sectors. Not only is there a promise of more money for early stage companies through a variety of programs but the changes to the scientific research and experimental development (SR&ED) rules are relatively benign for most SME's, particularly those with expenditures in excess of the $3 million annual limit. Of course, the budget math suggests the preservation of SR&ED for SME's and the new funds for innovation will essentially be borne by larger organizations starting in 2014. This is unfortunate since those same organizations will also be impacted by the recent Ontario government proposal to forego the reduction in the Ontario corporate tax rate from the current rate of 11.5% to 10%. Hopefully these large organizations, many of whom are key players in the Canadian life science ecosystem, will remain committed to investing and growing in Canada.

The Federal budget estimates approximately $1.2 billion in savings as a result of the proposed changes to the SR&ED program, which mainly include a reduction in the investment tax credit (ITC) rate for non-Canadian Controlled Private Corporations (CCPC’s) and non-qualifying CCPC’s to 15% from 20%, the elimination of capital expenditures from claim eligibility, a reduction in the proxy rate from 65% to 55% between 2013-2014 and a reduction of the eligibility of arm’s length contracts expenditures to 80%. Further details on these changes can be found in our PwC Federal Budget. On a positive note, there are no changes to the ITC rate, refundability or expenditure limits for CCPC’s. The Federal government remains committed to the SR&ED program and is dedicating $6 million from 2012-2014 to improve the Canada Revenue Agency’s (CRA) administration including testing a pilot pre-approval process and introducing a second science review (SSR) as part of a taxpayer’s notice of objection. Currently, when a SR&ED claimant has had a difference of opinion with the CRA regarding the science eligibility of a project, it can be difficult for the claimant to obtain another objective review. As long as the proposed SSR is fully independent, this is good news for life science SR&ED claimants.

The savings generated by the federal changes are proposed to be reinvested in direct support programs to reinforce business innovation in Canada, which is aligned to the recommendations of the Jenkins Report. Some of the main areas of focus that should positively impact funding for SMEs in the life sciences industry are as follows:

  • A new $400 million fund to support risk capital investments for growth-oriented innovative firms, focusing on those that are likeliest to become global leaders. The government will determine how to structure this support in the coming months;
  • $500 million of new funding over five years for the Canada Foundation for Innovation to support advanced research infrastructure;
  • Confirmation of the 2011 commitment to provide $100 million to the Business Development Bank of Canada’s venture capital program; and
  • $110 million to double the current IRAP program, which supports research & development projects by innovative small and medium-sized business.

We are also hopeful that the Ontario government's plan to create a Jobs and Prosperity Fund to focus on productivity growth and job creation will be positive for life sciences. Many life sciences SMEs have found Ontario's current mix of funding programs too difficult to access. It will be critical for the life sciences sector to ensure that it is well represented on the proposed Jobs and Prosperity Council (JPC). With a seat at the JPC table, the life sciences sector can better help the government understand how the sector contributes to productivity growth and innovation in Ontario.

It is also important to note that until there is a more comprehensive innovation policy at both the federal and provincial level, there remains a need for a clear and common industry voice to ensure future changes are designed appropriately to support the sector. For example, the 2012 Federal budget indicated the government will continue to study the Jenkins Report and the 2012 Ontario budget indicated the government will review the effectiveness of tax credits in supporting innovation and the overall framework of provincial and federal business supports. A common voice should help guide the government to implement policies that are favourable for the life sciences sector. In our December 2011 issue of Life Sciences Newsbrief, we noted a funding program like the Small Business Innovation Research (SBIR) program in the United States with certain adjustments relevant for the Canadian market could be a powerful tool for life sciences innovation. Similarly we suggested extending the existing (and recently renewed in the 2012 Federal budget) flow-through share regime available for certain junior resource companies to the life sciences sector. In order for these concepts to be adopted, a clear and common message must continue to be delivered to the relevant government officials.

Other Federal Developments

The Federal budget proposes additional funding for advanced research at Universities and other institutions. The proposed funding represents approximately $170 million over the 2012-2013 years and is mostly concentrated on post-secondary and private sector research collaborations and on genomic research. Health Canada and the Public Health Agency of Canada will also share services and eliminate duplicate administration costs of $200 million per year. The proposed funding includes:

  • Knowledge Transfer and Commercialization:
    • $24 million over two years and $12 million thereafter to make the business-led Networks of Centres of Excellence a permanent program.
  • Post-Secondary and Private Sector Research Collaborations (Canada’s granting councils):
    • $15 million per year to the Canadian Institutes of Health Research for Strategy for patient oriented research;
    • $15 million per year to the natural Sciences and Engineering Research Council for its Strategy for Partnerships and Innovation; and,
    • $7 million per year to the Social Sciences and Humanities Research Council for its industry academic partnership initiatives.
  • Genomic Research:
    • $60 million for Genome Canada to launch a new applied research competition in the area of human health, and to sustain the Science and Technology Centres until 2014-2015.
  • Medical Isotope Production:
    • 17 million over two years to National Resources of Canada to further develop alternatives to existing isotope production technologies; and
    • $107 million over two years for Atomic Energy of Canada Limited to support operations at Chalk River Laboratories.
  • Mental Health Research:
    • $5.2 million in 2012-2013 to support the Canadian Depression Research and Intervention Network.
  • Cost-Effective Health Care:
    • $6.5 million over 3 years for a research project at McMaster University to evaluate better health outcomes for patients while also making the healthcare system more efficient through greater implementation of medical teams.

The Federal budget also proposed various Goods and Services Tax/Harmonized Sales Tax (GST/HST) exempting and zero-rating measures including: pharmacist services, diagnostic services, certain medical and assistive devices, corrective eyewear and blood coagulation devices. The impact of the proposed changes is that all suppliers of the property and services listed above will cease to charge GST/HST when such supplies are made. This is good news for consumers and there should be no impact on the input tax credit entitlement of suppliers of the newly zero-rated products. However, the changes may increase costs for pharmacies and diagnostic service providers due to a reduced input tax credit entitlement.

Other Provincial Developments

The Saskatchewan government is committed to healthcare and have proposed a $60.5 million increase to funding for surgeries, $2.5 million increase for diabetes, $4 million to expand colorectal screening province wide and a $16.9 million increase for the Saskatchewan Cancer Agency. The budget also proposes new limits on the 15% refundable research and development credit. Qualifying CCPC’s will continue to receive refunds on the first $3 million of qualifying expenditures annually while the credit will become non-refundable for all other corporations. For more details on the Saskatchewan budget, please refer to our PwC Saskatchewan Budget memo.

Healthcare and life sciences continue to be a priority for Quebec. The majority of new spending on healthcare includes: $275 million for increased access to surgery, $177 million for services for seniors, $160 million for the maintenance of dialysis services and $141 million for oncology care. Quebec will also create an expert panel chaired by Wendy Thomson responsible for making recommendations on the implementation of a healthcare activity-based funding model. A new tax credit is proposed to defray a portion of IPO costs and the government will develop an export strategy for the bio-food industry. Finally, Quebec announced it will hold a life science forum with all industry participants invited to discuss the future of the sector in Quebec. For more details on the Quebec budget, please refer to our PwC Quebec Budget memo.

The British Columbia budget implements the previously announced increase in tax credits available under Small Business Venture Capital Act by $3 million a year. This program is similar to a flow-through share mechanism. Under the program, eligible investors in qualifying corporations can receive a 30% tax credit on their investment up to an annual limit of $60,000. If fully subscribed, this change could result in $10 million of new annual funding for early stage businesses. For more details on the British Columbia budget, please refer to our PwC British Columbia Budget memo.

Healthcare also continues to be a priority for Alberta with base funding to Alberta Health Services increasing by 6% as part of a 5 year funding commitment to deliver equitable health care across the Province. The budget proposes to allocate $100 million over three years to open Family Care Clinics; $2.5 billion will be allocated to Human Services; and an increase of $400 million will be provided to support for Assured Income for Severely Handicapped persons. Alberta is also removing the so-called “grind” relating to the Alberta SR&ED tax credit (i.e. they will compensate for the fact the Alberta credit reduces the federal SR&ED credit) and it is estimated this change will cost the Alberta government $25 million. As a result, Alberta will have one of the most competitive SR&ED tax credit in the country.